The following article is by Family Lending’s Robb Nelson, who discusses how borrowers can accelerate their mortgage payments and become debt-free faster. You can view Family Lending’s Ontario mortgage rates on RateHub.ca.
Accelerating your mortgage payments is the easiest way to build equity and pay down your debt faster. So what are you waiting for? Today’s low mortgage rates offer the perfect opportunity for Canadian homeowners to speed up their payments and tackle a larger chunk of their mortgage principle – without taxing their current budget.
The time is now
Five years ago, Canadians were tripping over themselves to lock in a well-discounted five-year fixed mortgage at 5.79 percent. Back then, the housing market was hot, housing prices were high and interest rates were climbing steadily higher.
Then the U.S. bubble burst, causing Canadian interest rates to drop to near-historic lows. Homeowners who had opted for a fixed five-year rate were left high and dry while their neighbours proceeded to take advantage of some of the nation’s lowest ever mortgage rates.
However, the time has come for these budget-savvy individuals to accelerate their pay down by making the most of their current mortgage payments.
How to get ahead without cramping your budget
If you’re one of the many Canadian homeowners who will renew or refinance their mortgage this year, congratulations – you’re about to save a boatload of money!
How? It’s all in the differential.
Let’s say you’re coming up on the end of a five-year fixed rate mortgage with an amortization of 30 years. If your house was roughly $300,000 that means you’ve likely been paying close to $1,745 a month as your mortgage payment. At the end of your five-year period you will have whittled away close to $22,000 off your mortgage principle.
If you renew your mortgage today and lock in a current best rate five-year fixed mortgage, your monthly payments will be nearly $400 less than they are currently. Now, you could decrease your payments and pocket the differential. Or, you could keep your payments where they’ve been for the past five years, rolling the differential directly onto your mortgage principle. Leaving your payments where they aren’t won’t strain your budget (you’ve been making due for the last five years, after all) and the best part? By 2017 you’ll have shaved an additional $25,000 directly off your mortgage.
Make the most of your pay down
You don’t have to be in the market to renew your mortgage in order to take advantage of an accelerated pay down program. All you need is a budget and a schedule. Here’s a quick look at how you can fast-track your mortgage:
Step 1) Talk to Your Lender or Mortgage Broker
The first step is to sit down and review your current mortgage payment plan. Talk to your lender and see if paying a little extra on top of your regular mortgage payment will help you reduce your principle faster. If you’re extremely disciplined, try and commit to $50 or $100 every payment. You’ll be amazed at he impact this will have on your mortgage term.
Step 2) Make More Frequent Payments
Biweekly payments will help shorten the amortization period of your mortgage loan immensely. The shorter your amortization period, the less money you’ll spend on interest charges. Paying your mortgage weekly will offer even bigger returns.
Step 3) Put Down a Lump Sump
If you’ve received a bonus or inheritance recently, consider putting at least a portion of it towards your mortgage principle. Just remember to talk to your lender first. Most banks allow you to make a large lump payment once a year, and normally there’s a limit to how much you can prepay.
Step 4) Refinance Your Mortgage with a Shorter Term
Crunch some numbers – if it makes sense to refinance, go for it. If possible, try and shorten the term of your mortgage at the same time. This will mean higher monthly payments, but in the end, you’ll own your home sooner.
Remember, the faster you can chip away at your mortgage principle, the more money you’ll save over the lifetime of your mortgage. From extra payments to lump sump deposits, there are a number of ways you can accelerate your mortgage and own your home sooner.